Page 422 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-30: Economics of Information

is minimum price in first shop, the rule of Stigler believes that buyer will continue his search by Notes
remembering this value. This is unreal because if consumer gets a minimum price then there is no
need to go further.

Rothschild’s Model
Rothschild says that Stigler’s decision rule is not optional because buyer is not utilizing the information
gathered during the search of price to consider this fact. So buyer makes a Sequential Search Model
and proposed the optimal rule that buyer decides to accept the price or to continue the search of price
after gathering the information of the price. The buyer can identify the price of a shop, when he knows
the distribution of price according to Stigler’s conception. He thinks distribution price as observed
minimum price P , which is reserved price for him. One more search has some profit E(G). The buyer
R
will continue the search as long as G (profit) is greater than the cost of search (c). He will stop searching
when he finds more cost than P . He accepts any price which is less than P or equal to P . But never
R
R
R
accepts any price greater than P . In fact E (G) = C.
R
Rothschild’s sequential rule is similar to Stigler’s decision rule. It says that a consumer’s search is
based on the behaviour search of cost of price distribution. The search of as pecked cost increases. If the
prices is more distributed, but the cost of search increases with the reducing the ratio of search. Buyer’s
search of behaviour is based on the Stigler’s concept of distribution of price while Rothschild rejects the
concept that a buyer has no information of distribution of price really. So he derived the Optimal Search
Rule by knowledge less distribution in his model.
Suppose that every search has a cost C and he wants to buy only one unit, while his income and
preferences are given. He is ready to pay the maximum price which is P . To know this maximum price
M
limit, he agrees, he can calculate all the average price of all shops which is P or less than P . When
M
M
P is maximum price which buyer is ready to pay and starts searching by which he understands the
M
reduction in fewer prices by P . The reduction feasibility in price in such a way, a (P ) is equal to cost
M M
and less as exempted cost E (P ) than P . So, the first search has following profit-
M M
E (G) = a (P ) [P – E (P )]
M M M
If this searched profit is more than the cost of search E (G) > C, then first search is justified. If this is less
E (G) < C, then the search is non-profitable. Suppose that buyer gets cost equal to P or more than that
M
then this is first search. This is not justified that in the second search for as pecked profit match with
the first search. Still if he gets the cost P in first search that is less than the P then the profit is less in
1
M
second search, i.e. P – P . So price rule says that expected profit of record search cannot more than
M 1
expected profit of first search.
According to Rothschild this is the reservation price P which makes extra cost of expected profit for
R
extra search. If buyer gets such a price which is equal to P or less than that then he will search no more,
R
because the expected profit for extra searching on this price would be equal to extra price or less than
this. So prior to start search, buyer fixed his P and rejected every price which is greater than P and
R
R
ends his search when he gets P or less than P price.
R R
According to Rothschild, the search costs of some buyers are more than others. So the behaviour of search
is different from one buyer to others. For example, the search cost and reservation price are more for a
rich man. While a poor buyer whose search cost and reservation prices are less, will go in lesser shops.
Self Assessment
Multiple choice questions:
4. After going to many shops the price which the buyer knows is .............. .
(a) a hint (b) an expense (c) the cost (d) none of these

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